HCE in multiple plans and ADP testing

[RCK]

Facts:

1. Employer has multiple business units, and several 401(k) plans, covering different non-overlapping collections of those units.

2. Participant transfers from one business unit to another, and as a result of that moves from one plan to the other.

3. Because the plans are all with the same recordkeeper and same trustee, we do an automatic plan-to-plan transfer of his account to the new plan.

4. Let's say that he contributes $6,600 based on $60,000 of earnings while in Plan A and $4,400 based on $40,000 of earnings while in Plan B.

5. The plans are not aggregated for coverage or ADP/ACP testing.

Our interpretation of Reg 1.401(k)-1(g)(1)(ii) is that all contributions and all earnings count in both plan's ADP tests. Let's say that Plan A passes ADP/ACP, but that B flunks badly and refunds are required.

I'm left with a bunch of questions, but I think I can consolidate them down to two:

1. In determining the aggregate excess contributions, how much of the employee's earnings/contributions do we count?

2. In determining the transferred participant's excess contributions, how much of his earnings/contributions do we count?

RCK

[jquazza]

Unless each business units qualifies as a QSLOB, you should probably aggregate the plans for coverage. You can test them separately for ADP/ACP only if they pass coverage independently.

Based on this, when you test each plan independently, you might want to consider only the contributions made to that particular plan. As far as earnings are concerned, the plan document should dictate what method to use. If the document is flexible and since there is a standing transfer agreement between the plans, it would be reasonable to include the gains from both plans.

[Mike Preston]

I'm not sure Jerome understood the nature of the question. Either he did, or I do. But I don't think both of us do. If he did, just ignore me!

As you point out, the ADP/ACP tests for both plans will consider this individual as having $100,000 in compensation (using the term earnings to mean compensation is frequently confusing) and as having deferred $11,000.

From that, all things flow.

Also, the plan document might actually have an indication of how the refunds are to be handled in this case.

I can see a possible problem in that it may be necessary to refund more than the $4,400 to this individual to make the "dollar down" correction, if we presume the starting point is $11,000.

Hmmmmmm.....gotta go check my document.....

Darn....nothing in there....guess the reg is all we have.

So, I would say that unless your document has clear rules to follow that you have to do something "reasonable." You have to give back the appropriate number of dollars, between all the HCE's (this person _is_ an HCE, right?). Whether you start this person at $11,000 or $4,400 when determining the amount of the dollar down adjustment doesn't really matter, as long as the total number of dollars given back to HCE's is correct.

Good question.

[RCK]

Thanks for the responses. To clarify, we have never done SLOB testing, and this participant is an HCE.

Mike seems to "get" the question better, although he did not provide an answer that I like.

I was hoping for a cite that said that since this was not a discretionary act, and since the participnat was never eligible for both plans at the same time, we could disregard the participation in the plan that passed. Then we could calculate both the excess contribution and the allocation to the participant based on only the $11,000.

But it's not looking good.

RCK

[Mike Preston]

Why isn't it looking good? What is the difference between what you have described and what I described?

[RCK]

I thought that you were saying that the aggregate excess contribution was based on using the entire $11,000 and $100,000. As long as that's the case, we're facing a large refund.

I was hoping to find a way to base the total excess on the smaller contribution base, and therefore come up with a smaller return of excess contributions.

RCK